Fraud And Corruption Trends To Watch In 2014

Many of the regulatory efforts in the coming year to stem fraud and corruption will have a financial services focus, according to an EY forecast.

Fraud may be a moving target, but banks of all sizes are going to be under closer scrutiny than ever in the coming year for potentially fraudulent actions. That's the warning from advisory firm EY, which has identified several key themes on the fraud and corruption front for 2014. Among those trends are that the financial services industry will feel the impact of regulation "stronger than ever," according to a company statement. According to EY:

"Notwithstanding the billions of dollars in restitution, fines and litigation costs incurred to date by banks and securities firms, regulatory pressure is not expected to dissipate in 2014. Important themes from 2013 will likely continue as the industry responds to broad regulatory focus on systemic risk and reacts to Consumer Financial Protection Bureau (CFPB) rulemaking on mortgage loans, student loans and credit cards. Regulatory enforcement pressure, which heretofore has focused on the largest institutions, may also migrate to midsized banks in 2014 prompting reassessment and enhancement of risk and compliance efforts at this tier."

A related challenge for financial services companies -- not just banks, but also insurers and other firms that handle funds -- predicts EY, is that their anti-money laundering and corruption programs will face greater regulatory scrutiny in the coming year:

"Global regulators and the Department of Justice continue to press large, global financial institutions on the issues of money laundering, trade sanctions and bribery and corruption, stressing the need for robust program controls, sophisticated monitoring systems and knowledgeable personnel at the watch. The regulatory scrutiny is now moving beyond the traditional banking sector into non-banks, including credit card issuers, insurance providers and gaming enterprises, prompting the need to seriously review and enforce their compliance programs and controls."

EY also emphasizes that in the coming year the burden of dealing with cybercrime, fraud and other breaches will not be limited to IT, security functions or operations. It "will become part of a General Counsel's responsibility set," the EY report predicts. "These risks are requiring immediate and planned responses organized by inside and outside counsel. Additionally the potential shareholder impact, risk due to state-run and industrial cyber-espionage, loss of highly valuable IP, unique business process, or client data elevates the responsibility of cyber-security to a Board level exercise."

Fortunately for financial institutions, their investments in big data and analytics to provide greater customer and transactional insights are likely to start paying off on the fraud front, according to the EY forecast, which suggests, "The opportunity to leverage 'Big Data' in the context of compliance and anti-corruption will allow companies to ask new questions." According to EY:

"Data analytics, traditionally the domain of marketing and sales, has effectively migrated into the realm of internal audit, compliance, and corporate oversight. Companies now have opportunities to use forensic data analytics for proactive monitoring of business data. Organizations will be able to develop a better understanding of the risks and rewards of forensic data analytics and how these techniques can be used to transform data to help detect potential instances of fraud and implement effective fraud risk mitigation programs."

Non-financial services-related predictions among EY's 2014 fraud and corruption trends forecast include the need to balance growth opportunities in Africa with perceived corruption risk, and ongoing compliance challenges for life sciences companies operating in emerging markets.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

The burden of dealing with cybercrime, fraud and anti-money laundering is changing the nature of general counsel office's skill set. How does a lawyer go about obtaining these skills?I predict these legal departments will be hiring their own security and forensic data analytics professionals or partner with the IT department and other analytical areas within the bank or brokerage firm.